In advance of an
This reflects a view of brokered deposits as they first emerged during the 1980s, when they were used by many failing S&Ls as a quick source of money to originate new loans that might save an institution hemorrhaging due to a prolonged rate mismatch caused by inflation. But brokered deposits have evolved into something quite different over the past 30-plus years.
More recently, a replay of the rapid-growth model played out in the 2008-10 mortgage debacle, when some community banks combined brokered deposits with retail deposits in order to lend rapidly in overheated housing markets like the Southeast. The bursting of the housing bubble eventually caused many of those banks to fail. I have not seen figures on the ratio of brokered to core deposits at those institutions, but I am reasonably certain the vast majority held mostly core deposits.
Brokered deposits were criticized both times as funding imprudent growth and having no franchise value when a bank failed and had to be liquidated. But one would be hard-pressed to say brokered deposits caused those failures. Brokered deposits are just deposits and they can only be accepted by well-capitalized banks. They may have enabled some banks to go on a binge of bad lending to make more bad loans than they could have with core deposits alone, but that is like blaming McDonald's because some of its customers have health issues. The more pertinent question is why the regulators (and bank management) didn’t catch the epidemic of bad lending.
I have not seen figures on what the franchise value of core deposits was during the recession. Today, the value of core deposits sold by a healthy bank is in the range of 1% to perhaps 3%. The distressed value of core deposits in a market flooded with failing banks was probably less. I am aware of no studies analyzing the all-in cost to the FDIC of the lost franchise value of brokered deposits held at failed banks, but I suspect it is marginal and could easily be covered by adjusting insurance premiums.
It should also be noted that branchless banks funded totally with brokered deposits had the lowest failure rate during the last recession. Some of those banks actually grew as other banks hunkered down and shed noncore business.
In reality, Isaac's characterization of brokered deposits is badly outdated. Today, the process for acquiring most brokered deposits is the reverse of how he describes it. Banks contact the brokers when they need money and shop for the lowest rate. Because brokered deposits are viewed as comparable to government securities and most depositors are seeking safety, the rates tend to be just above government securities for comparable terms. While critics often describe these as "volatile and risky," brokered CDs are actually the opposite. Today they are the most stable and lowest all-in cost source of funding available to a bank.
There are still some entities shopping bundles of deposits to the highest bidder, but they are mostly program managers managing pools of money for entities like retirement funds and educational savings programs. A bank may be willing to offer higher rates because of the efficiency of acquiring large omnibus deposits, but that is offset by the concentration and liquidity risk. Some program managers have to use multiple banks because the concentrations are too big except for the largest banks. That is not a market where banks aggressively bid rates higher.
What is the rationale for Isaac’s
Today brokered deposits are mostly utilized by the largest banks and branchless banks that provide specialized products to a nationwide market. A typical branchless bank can cut its efficiency ratio nearly in half and double its return on assets compared to a bank or credit union that has branches. The savings enables these banks to even beat the credit unions on rates and rewards for things like credit cards. Community banks stopped competing for that business long ago.
The largest banks hold most brokered deposits today. In addition to promoting mobile checking, they take large amounts of brokered deposits to replace many of their traditional checking accounts.
Community banks remain the leaders in customer service and use of core deposits and will continue to thrive as long as borrowers and depositors value that kind of service. Those customers are not chasing rates and their deposits continue to provide a reliable and cost-effective source of funding. Brokered deposits are not a threat to this model, they are just a different model competing for different customers.
